Investing.com -- EUR/USD could move back toward its summer highs near 1.17 if next week's Federal Reserve decision triggers a "sell the news" reaction in the dollar, Citi strategists said, though geopolitical and energy risks could limit the greenback's downside.
The outlook comes as geopolitics and energy markets complicate the signals coming from relative interest rates. Central bank responses to the energy shock and changes in countries' terms of trade can pull currencies in different directions.
Rates markets have continued to price higher terminal interest-rate expectations across major economies. Economic growth has remained resilient despite the energy shock, with global investment linked to artificial intelligence also supporting demand.
A "dovish hike" from the Fed is seen as the most likely outcome next week. Such a move could weigh on the dollar tactically if traders respond by selling the currency following the decision.
Still, persistent geopolitical risk premiums and attractive U.S. real interest rates could limit the scale of any dollar decline. Those factors underpin a more constructive six-to-12-month outlook for the U.S. currency compared with the shorter-term view.
For the euro, recent European Central Bank policy has shown how energy and geopolitical developments can complicate the usual relationship between rates and currencies. A hawkish ECB alone may not be enough to generate sustained euro gains if geopolitical concerns remain elevated.
From a technical perspective, EUR/USD has found support around 1.1575, a level that marked the high following the post-Liberation Day rally and has since acted as an important pivot within the pair's roughly 1.14-to-1.18 range over the past year.
Holding above 1.1575 leaves the near-term risk-reward tilted toward further gains, though geopolitical pressures could constrain the upside.
A Fed decision interpreted by markets as an opportunity to take profits on recent dollar strength could send EUR/USD back toward the summer highs around 1.17.
EUR/USD could retest 1.17 after Fed decision - Citi says
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